Wednesday, February 24, 2010

On Intellectual Property and Guard Labor

For several years now Michele Boldrin and David Levine have been making a vigorous case for the outright elimination of most copyright and patent protection. A very accessible (and entertaining) overview of their arguments may be found in Against Intellectual Monopoly, a version of which can (appropriately enough) be downloaded without charge. In it, the authors claim that patent protections stifle rather than stimulate technological innovation, and that copyright has the same chilling effect on artistic creativity. They point to examples of flourishing and innovative industries that thrive without such protections, and others in which the expansion of legal coverage has resulted in stagnation or decline. In doing so, they strike at the heart of the usual argument in favor of intellectual property rights, namely that such rights are necessary for sustaining economic vitality and variety.

Boldrin and Levine's use of the term "monopoly" rather than "property" to characterize patents and copyrights clearly adds rhetorical force to their arguments, but it also has an interesting precedent in English law:

It was the English Parliament that, in 1623, pioneered patent law with the aptly named Statute of Monopolies. At the time the euphemism of intellectual “property” had not yet been adopted – that a monopoly right and not a property right was being granted to innovators no one questioned. Moreover... the Statute did not create a new monopoly. It took the monopoly away from the monarchy (represented at the time by King James I) and lodged it instead with the inventor. It therefore replaced the super-monopolistic power of expropriation the Crown had enjoyed till then, with a milder monopoly by the inventor... The historical facts are worth keeping in mind vis-à-vis the frequent claims that it was the introduction of patent privileges in the seventeenth century England that spurred the subsequent industrial revolution.

In fact, the authors argue that patent protection delayed the industrial revolution by a generation as James Watt used the "full force of the legal system" to inhibit the spread of superior variants of his invention:

After the expiration of Watt’s patents, not only was there an explosion in the production and efficiency of engines, but steam power came into its own as the driving force of the industrial revolution. Over a thirty year period steam engines were modified and improved as crucial innovations such as the steam train, the steamboat and the steam jenny came into wide usage. The key innovation was the high-pressure steam engine – development of which had been blocked by Watt’s strategic use of his patent. Many new improvements to the steam engine, such as those of William Bull, Richard Trevithick, and Arthur Woolf, became available by 1804: although developed earlier these innovations were kept idle until the Boulton and Watt patent expired.

Nor was this an isolated case. In 1902, the Wright brothers "managed to obtain a patent covering (in their view) virtually anything resembling an airplane." They subsequently invested little effort in developing and marketing aircraft, but did spent "an enormous amount of effort in legal actions" to prevent other innovators such as Glenn Curtiss from doing so. At around the same time in England, the Baadische Chemical Company used a broad patent covering textile coloring to prevent a competitor, Levinstein, from using a "superior process to deliver the same product." The former company was unable to understand and exploit the new technology, however, and was put out of business when the latter began production in the Netherlands. Other examples of patent holders preventing the spread of innovations that they could not themselves use or profit from are scattered throughout the book.

In contrast, there are numerous cases of rapid innovation in industries with no recognized intellectual property rights. Software could not be patented before 1981, nor could financial securities prior to 1998; yet the pace of innovation was frantic in both sectors. Consider software:

What about the graphical user interfaces, the widgets such as buttons and icons, the compilers, assemblers, linked lists, object oriented programs, databases, search algorithms, font displays, word processing, computer languages – all the vast array of algorithms and methods that go into even the simplest modern program? ... Each and every one of these key innovations occurred prior to 1981 and so occurred without the benefit of patent protection. Not only that, had all these bits and pieces of computer programs been patented, as they certainly would have in the current regime, far from being enhanced, progress in the software industry would never have taken place. According to Bill Gates – hardly your radical communist or utopist – “If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today.”

Even today, the rate of innovation in open-source software remains vigorous without the benefit of protection:

Whatever you are viewing on the web – we hesitate to ask what it might be – is served up by a webserver. Netcraft regularly surveys websites to see what webserver they are using. In December 2004 they polled all of the 58,194,836 web sites they could find on the Internet, and found that the open source webserver Apache had a 68.43% of the market, Microsoft had 20.86% and Sun only 3.14%. Apache’s share is increasing; all other’s market shares are decreasing. So again – if you used the web today, you almost certainly used open source software.

Another industry that remains largely unprotected by intellectual property law is fashion design. Again one finds evidence of creativity and innovation alongside extensive and rapid replication by lower cost imitators:

Even the most casual of observers can scarcely be unaware of the enormous innovation that occurs in the clothing and accessories industry every three-six months, with a few top designers racing to set the standards that will be adopted by the wealthy first, and widely imitated by the mass producers of clothing for the not so wealthy shortly after. And “shortly after”, here, means really shortly after. The now world-wide phenomenon of the Spanish clothing company Zara (and of its many imitators) shows that one can bring to the mass market the designs introduced for the very top clientele with a delay that varies between three and six months. Still, the original innovators keep innovating, and keep becoming richer.

The invention of new techniques in professional sports seems completely unhindered by the fact that the innovators have no power to prevent their creations from being copied:

Innovation is also important in sports, with such innovations as the Fosbury Flop in high jumping, the triangle offense in basketball, and of course the many new American football plays that are introduced every year, serving to improve performance and provide greater consumer satisfaction. Indeed, the position of the sports leagues with respect to innovation in their own sport is not appreciably different from that of the benevolent social planner invoked by economists in assessing alternative economic institutions.

Given that sports leagues are in the position of wishing to encourage all innovations for which the benefits exceed the cost, they are also in the position to implement a private system of intellectual property, should they find it advantageous. That is, there is nothing to prevent, say, the National Football League from awarding exclusive rights to a new football play for a period of time to the coach or inventor of the new play. Strikingly, we know of no sports league that has ever done this. Apparently, in sports the competitive provision of innovation serves the social purpose, and additional incentive in the form of awards of monopoly power do not serve a useful purpose.

There is no doubt that the world would look very different in the absence of patents and copyrights, and this includes the nature of contracts written between creators and distributors of content. To get a glimpse of the kinds of contracts that are likely to become widespread if copyright were to be eliminated, one can look back at the case of publishing in the 19th century, when English authors has no protection with respect to sales in the United States. Yet they often managed to secure lucrative deals with American publishers:

How did it work? Then, as now, there is a great deal of impatience in the demand for books, especially good books. English authors would sell American publishers the manuscripts of their new books before their publication in Britain. The American publisher who bought the manuscript had every incentive to saturate the market for that particular novel as soon as possible, to avoid cheap imitators to come in soon after. This led to mass publication at fairly low prices. The amount of revenues British authors received up front from American publishers often exceeded the amount they were able to collect over a number of years from royalties in the UK.

Now one might argue that with dramatically lower costs of copying and electronic distribution, such a system would not be viable today. Boldrin and Levine provide a truly fascinating rebuttal to this argument:

What would happen to an author today without copyright?

This question is not easy to answer – since today virtually everything written is copyrighted, whether or not intended by the author. There is, however, one important exception – documents produced by the U.S. government. Not, you might think, the stuff of best sellers – and hopefully not fiction. But it does turn out that some government documents have been best sellers. This makes it possible to ask in a straightforward way – how much can be earned in the absence of copyright? The answer may surprise you as much as it surprised us.

The most significant government best seller of recent years has the rather off-putting title of The Final Report of the National Commission on Terrorist Attacks Upon the United States, but it is better known simply as the 9/11 Commission Report. The report was released to the public at noon on Thursday July 22, 2004. At that time, it was freely available for downloading from a government website. A printed version of the report published by W.W. Norton simultaneously went on sale in bookstores...

Because it is a U.S. government document, the moment it was released, other individuals, and more important, publishing houses, had the right to buy or download copies and to make and resell additional copies – electronically or in print, at a price of their choosing, in direct competition with Norton... And the right to compete with Norton was not a purely hypothetical one. Another publisher, St. Martin’s, in collaboration with the New York Times, released their own version of the report in early August, about two weeks after Norton, and this version contained not only the entire government report – but additional articles and analysis by New York Times reporters. Like the Norton version, this version was also a best seller. In addition it is estimated that 6.9 million copies of the report were (legally) downloaded over the Internet. Competition, in short, was pretty fierce.

Despite this fierce competition, the evidence suggests that Norton was able to turn a profit... we know that they sold about 1.1 million copies, and that they charged between a dollar and a dollar fifty more than St. Martin’s did. Other publishers also estimated Norton made on the order of a dollar of profit on each copy. Assuming that St. Martin’s has some idea of how to price a book to avoid losing money, this suggests Norton made at the very least on the order of a million dollars...

What, then, do these facts mean for fiction without copyright? By way of contrast to the 9/11 commission report, which was in paperback and, including free downloads, seems to have about 8 millions copies in circulation, the initial print run for Harry Potter and the Half-Blood Prince was reported to be 10.8 million hardcover copies. So we can realistically conclude that if J.K. Rowling were forced to publish her book without the benefit of copyright, she might reasonably expect to sell the book to a publishing house for several million dollars – or more. This is certainly quite a bit less money than she earns under the current copyright regime. But it seems likely... that it would still give her adequate incentive to produce her great works of literature.

While Boldrin and Levine focus largely on the effects of intellectual property rights on innovation and creativity, they also recognize the enormous waste of resources that arises in order to secure, protect and exploit these rights. There are four types of inefficiencies that can result. The most obvious is the fact that monopoly pricing excludes from the market many who would be willing and able to pay well above the current costs of production for a product; this can be particularly tragic in the case of life-saving pharmaceuticals. Second, there are the productive inefficiencies that tend to arise when firms are sheltered from competition. Third, there are investments in lobbying that serve no productive purpose but are designed to alter the legislative landscape in one's favor. And fourth, there are the costs of legal action and deliberate manipulation of product design to prevent copying and competition.

In fact, the widespread adoption of patents and copyrights has given rise to a peculiarly modern and highly skilled form of what Arjun Jayadev and Sam Bowles refer to as guard labor (see, for instance, Mark Thoma's recent post on their work.) In the context of intellectual property rights, guard labor includes not just legal teams but also individuals with considerable technical expertise who can alter product characteristics in a manner that prevents resale across segmented markets. As Boldrin and Levine note:

For example, music producers love Digital Rights Management (DRM) because it enables them to price discriminate. The reason that DVDs have country codes, for example, is to prevent cheap DVDs sold in one country from being resold in another country where they have a higher price. Yet the effect of DRM is to reduce the usefulness of the product. One of the reasons the black market in MP3s is not threatened by legal electronic sales is that the unprotected MP3 is a superior product to the DRM protected legal product. Similarly, producers of computer software sell crippled products to consumers in an effort to price discriminate and preserve their more lucrative corporate market. One consequence of price discrimination by monopolists, especially intellectual monopolists, is that they artificially degrade their products in certain markets so as not to compete with other more lucrative markets.

Technically skilled labor is required not only to alter product characteristics, but also to identify products and processes that could be patented for entirely defensive purposes:

The following statement is from Jerry Baker, Senior Vice President of Oracle Corporation

Our engineers and patent counsel have advised me that it may be virtually impossible to develop a complicated software product today without infringing numerous broad existing patents. … As a defensive strategy, Oracle has expended substantial money and effort to protect itself by selectively applying for patents which will present the best opportunities for cross-licensing between Oracle and other companies who may allege patent infringement. If such a claimant is also a software developer and marketer, we would hope to be able to use our pending patent applications to cross-license and leave our business unchanged.

Pundits and lawyers call this “navigating the patent thickets” and a whole literature, not to speak of a lucrative new profession, has sprung up around it in the last fifteen years. The underlying idea is simple, and frightening at the same time. Thanks to the US Patent Office policy of awarding a patent to anyone with a halfway competent lawyer – and, as noted a moment ago, IP lawyers have quadrupled – thousands of individuals and firms hold patents on the most disparate kinds of software writing techniques and lines of code. As a consequence, it has become almost impossible to develop new software without infringing some patent held by someone else. A software innovator must, therefore, be ready to face legal actions by firms or individuals holding patents on some software components. A way of handling such threats is the credible counter-threat of bringing the suitor to court, in turn, for the infringement of some other patent the innovative firm holds.

The idea that certain categories of labor inhibit rather than promote economic growth dates back at least to Adam Smith. The third chapter in Book II of the Wealth of Nations bears the title: "Of the Accumulation of Capital, or of Productive and Unproductive Labour." In it, Smith states in no uncertain terms that the manner in which labor is divided among productive and unproductive occupations affects the rate of economic growth:

Both productive and unproductive labourers, and those who do not labour at all, are all equally maintained by the annual produce of the land and labour of the country. This produce, how great soever, can never be infinite, but must have certain limits. According, therefore, as a smaller or greater proportion of it is in any one year employed in maintaining unproductive hands, the more in the one case and the less in the other will remain for the productive, and the next year’s produce will be greater or smaller accordingly; the whole annual produce, if we except the spontaneous productions of the earth, being the effect of productive labour.

Smith's argument has even greater force in an economy where some of the most highly skilled individuals are assigned to unproductive tasks. These are precisely the individuals who are best equipped to push against the technological frontier. Their loss in the productive sector therefore lowers the rate of growth for two reasons: they are unavailable to produce goods and services under current technologies, and the rate of technological progress is itself retarded.

There is much more in the book than I have been able to survey here. I have not discussed the theoretical models that provide the analytical foundation for the authors' recommendations. Nor have I mentioned the frivolous patents for methods of putting in golf or swinging a swing, or the submarine patents that seek to anticipate innovations by others. The book expands on all these issues and more, and ends up making as convincing a case for the abolition of intellectual property rights as you are likely to find anywhere. The authors do concede that there may be industries in which the absence of protection may result in suboptimal levels of innovative activity, but argue that even in such cases, direct subsidies rather than monopoly rights would be a superior policy response. Regardless of whether or not you are eventually sold on the main idea, you cannot fail to be impressed by the originality, breadth and detail of the argument. Such books are now a rarity in economics, but Against Intellectual Monoply is proof that they are not yet extinct.

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Update (2/25). Boldrin and Levine provide a concise overview of their arguments (along with a response to some of their critics) in a recent article in the Review of Law and Economics. And this post contains a good discussion of the Jayadev and Bowles paper on guard labor, with applications to intellectual property rights. The author (mtraven) argues that guard labor is in its "purest and most apparently wasteful form when it is guarding digital content," and has this to say about open source software:

In fact, the whole free/open source movement in software and elsewhere may be seen as a response to the unpleasantness of guard labor. Proprietary software requires licensing schemes... that cause new bugs, interfere with legitimate uses, and more generally cause friction. More broadly, locking software behind a pay wall reduces the amount of sharing and requires frequent reinvention of the wheel. It's inefficient, and this drives engineers crazy. Most of the time they don't get to vote, but the FOSS movement arose as a direct response to some of the unpleasantness surrounding proprietary software and has in its way been amazingly successful...

I was around for the birth of the open source movement and efficiency really had nothing to do with it -- it was a moral struggle, based on the anguish of the excluded when a once open resource suddenly being subject to enclosure and guarding. But its ongoing success happened because of efficiency and the self-interest of software producers and companies.

The entire post is worth reading. Lots more on this topic (including occasional posts by Boldrin and Levine) may be found on the blog Against Monopoly.

6 comments:

Interesting. I appreciate the approach using incentives to analyze this issue. So often lines are drawn in absolutes, but I think it largely comes down to incentives to innovate. Copyright provides some incentives, certainly, but it seems rife with disincentives as well.

I'll point that I downloaded the pdf for their book, and plan on giving it a look--something that I would not have done were it not so available. There's something to be said for immediacy and ease of use.

Last week, I began pondering alternative incentives other than industry crippling monopolies. I initially thought that if the "rights" were managed by a neutral entity, other than the holder, yes... I'm talking about the new USPTO in some Utopian reality, where society's access to free markets is placed above private interests. That incentive could be provided based on a flat tax, that shall never exceed n% of revenue derived specifically from use of these inventions. That sounds like more interference at the outset, but if we must have these ridiculous monopolies, lets at least give the people a say in their enforcement. It effects them so much more than they realize.

Of course a patent does not confer a monopoly. It merely confers the power to prevent someone else from making, using, or selling your invention. Just because you have a patent does not mean you can practice the invention. Your invention may be an improvement on another patented invention. In this case some sort of cross-licensing agreement is signed and the parties can go on their merry way to make money